Putin’s violent thuggery has roused a powerful opponent
But it’s the economic sanctions that have inflicted the heaviest damage on Russia. By Monday, the insignificant announcement of new sanctions had started a national bank run.
The ratings agency S&P Global downgraded Russian sovereign debt to junk position. The Russian ruble, already weakened, plummeted further on Monday and was down by 40 to 50 per cent in under a week. A ineffective money method higher prices for consumers. And higher inflation method higher interest rates. The meaningful policy rate in Russia more than doubled to 20 per cent on Monday. Recession looms.
But keep up on. The West has had sanctions in place against Russia since Moscow attacked Ukraine in 2014. Why the sudden financial earthquake?
In a information, Germany, the second case study. The US was pushing three particularly tough options. But any meaningful sanctions required the European Union (EU) to join, and the EU is nothing without Germany.
Germany under former chancellor Angela Merkel was careful not to antagonise Putin. Her substitute, the centre-left Chancellor Olaf Scholz, seemed already more accommodating at first. He was so timorous as the Ukraine crisis built that Der Spiegel lashed him for being “almost invisible”.
German Chancellor Olaf Scholz was accused of being almost invisible on Russia.Credit:AP
But a near-miraculous transformation has occurred in Berlin in just a few days. First, Scholz agreed to US demands that Germany stop the commissioning of the Nord Stream 2 gas pipeline.
As Germany phases out coal and nuclear strength, it had been counting on Nord Stream 2 to deliver huge quantities of Russian gas into its energy system. Merkel had always defended the project, which is built but not in addition certified. Scholz last week aborted certification to punish Russia for invading Ukraine.
But this comes at a cost to Germany, too, so required some political courage. Gas prices in Europe immediately jumped by 13 per cent. Scott Morrison has said that Australia stands ready to supply European shortfalls.
Second, the US hypothesizedv to shut some meaningful Russian edges out of the global interbank payment system known as rapid. This would make it harder for Russia to pay for its imports and to receive payment for its exports. But it would also damage the Western companies that enjoy selling products to Russia.
On Friday night, as the invasion began, a EU meeting broke up without agreement on this proposal. Germany and others opposed it as too drastic. By Saturday, as German public opinion raged against Russia, Scholz reversed position and the other Europeans followed.
meaningful Russian edges, including some that are known to be used by Putin and cronies for their personal fortunes, are now shut out of rapid and unable freely to transact with the world’s 11,000 major financial institutions. The European Commission president, Ursula von der Leyen, said this would damage Putin’s ability to “finance his war machine”.
Beyond that, it’s not a small matter for Russia’s trade lifeline, nor for the President himself. “Putin is a kleptocrat who’s smuggled $US20 billion ($AU27.7 billion) a year out of the Russian economy for 25 years,” says David Asher, a former US Treasury official with thorough experience in American financial sanctions.
Third is the nuclear option of the financial world, something the Americans call “the Iran form”. Which is to isolate the nation’s central bank so that it cannot sustain the national economy or the government.
Explains Asher: “You go after the central bank when you want the country to fall. It’s like an economic act of war. It might work. It might be the thing that leads to extreme escalation by Putin. We’ve never done this before.”
But the US did it to Iran. Indeed, Asher was part of the operation. “We did go after Iran’s central bank, but they didn’t have the ability to threaten us with enormous retaliation. Are we ready for that?”
Scholz went further. He transformed Berlin’s post-Cold War military posture. “With the invasion of Ukraine,” Scholz told the Reichstag, “we are in a new era.” Germany, he said, would supply 1000 anti-tank weapons and 500 Stinger surface-to-air missiles to Ukraine.
Further, he announced the end to a deeply held German policy. Until now, Germany banned other countries from supplying German-made weapons to third countries. Scholz hypothesizedv abolishing the ban so that nations could supply German arms to Ukraine. “Germany delivers!” was the headline in Bildt.
And Scholz announced a doubling of Germany’s defence budget from about 1 per cent of GDP to over 2 per cent within three years. “President Putin produced a new reality with his invasion of Ukraine. This new reality requires a clear response. We have given it.” The Bundestag gave Scholz a standing ovation.
It was a decisive end to Germany’s postwar pacifism, and its post-Cold War inertia. The major strength of Europe has new spine. Germany’s economy is more than double the size of Russia’s, and the combined economies of the EU are nearly 10 times Russia’s.
Putin’s violent thuggery has given Germany and the EU new resolve. It’s more united with the US than it has been in decades. Putin ultimately might gain Ukraine, but he has certainly roused a powerful opponent.
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